We rate management’s capital allocation actions as Exemplary, owing to Hormel’s sound balance sheet, effective capital allocation, and disciplined acquisition strategy. The firm has posted consistently strong economic returns, with a five-year average return on invested capital including goodwill of 18% versus our 7% weighted average cost of capital assumption.
We believe Hormel has done an excellent job managing its portfolio of brands. It has a record of extracting value from acquisitions by increasing points of distribution, household penetration, and market share. Skippy, Applegate, and Wholly Guacamole are all examples of expanded distribution and revenue post-acquisition. In addition, the company has sold several nonstrategic businesses that have not met its hurdles for growth and/or profitability. Most recently, it sold a pork processing plant, a commodity business, to free up capital for value-added, higher-margin businesses. As a result, operating margins have increased from 9% to 12% in the past 10 years. One of the most recent acquisitions, Columbus, a provider of premium deli meats, was completed in November 2018 for $857 million, the largest acquisition in the company’s history. The deal positions Hormel as a total deli solutions provider and serves as a catalyst for uniting all deli businesses into one customer-facing organization. Hormel paid 2.9 times revenue, a price we believe is fair, as it is in line with other food deals completed in the second half of 2018.
We also applaud the firm’s capital allocation strategies. Hormel has one of the strongest balance sheets in the packaged food space, with the company generally holding more cash than debt. Hormel also has an impressive record of increasing dividends consecutively for 93 years and remains committed to maintaining this trend. After dividends, the firm’s largest use of cash is capital expenditures, which we expect to continue at 3%-4% of sales annually. Finally, we think it is appropraite that the firm participates in share repurchases opportunistically, when transactions represent a good return on investment.